Pound Enjoys a Bevvy of Forecast Upgrades Following a Sterling Run Higher

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Pound Sterling's strong start to 2018 has seen it earn a number of forecast upgrades at the start of February.

On the back of the strong performance we note the currency has caught many analysts by surprise and prompted them to review their forecasts as a result.

Investec: On January's Performance Alone Sterling Can Go Higher

Analysts at Investec - the global investment bank - have advised they are now minded to raise forecasts for Sterling noting - amongst a number of reasons - that January is typically a good precursor to subsequent moves in the Pound over the remainder of the year.

"Do January moves in the Pound tend to presage trends over the rest of the year? The answer is yes," say analysts at Investec in a recent client briefing.

Investec's end-2018 forecast for the Pound-to-Dollar exchange rate is at 1.41 and 1.1363 for the Pound-to-Euro exchange rate. "Sterling has either already crashed through or come very close to our end-2018 targets. Our medium-term currency forecasts are now under review," advise Investec.

ING Forecasts Upgraded, but Patience Required

ING Bank NV observe the Pound has now moved above their long-held conviction call of 1.40 against the USD for this quarter – "but even we're slightly surprised by the speed at which we have got there," notes analyst Viraj Patel.

Like many other fellow analysts, Patel notes most of the Pound's advance has had a lot to do with extensive dollar weakness – "which has evolved pretty much in line with our thinking".

But ING believe a "subtle shift" is underway pertaining to the directional sentiment for the Pound – "not least as the doomsday Brexit tail risks gradually fade (for good reasons, they will never fully disappear)".

ING are now looking for GBP/USD to move up to 1.45 as the UK economy regains some of its cyclical swagger – but they do think that patience is required before markets take that bet.

ING cite two non-mutually exclusive catalysts for this to happen: (1) positive UK data surprises and (2) reduced UK economic uncertainty in the form of an agreed Brexit transition deal.

UniCredit: Forecasts Raised (But Largely Thanks to Dollar Weakness)

"We revised our GBP/USD forecasts up to 1.49 and 1.52 for the end of 2018 and 2019, respectively," says Roberto Mialich, FX Strategist with UniCredit in Milan. "But we stressed that this change was more a reflection of the prospect of a further USD weakening than a genuine shift towards more optimism over the UK economy and the British Pound."

Mialich notes the latest economic data in the UK, most notably the labor market report, GDP growth and rebounding GfK Consumer Confidence, have certainly surprised to the upside, "but we are still confident that the UK economy will grow more slowly this year than in 2017."

In addition, a hawkish BoE is also unlikely to offer a big boost now, as at least onemore move is totally reflected in the UK forward curve, while two rate hikes over a 1Y horizon are also priced in at nearly 70%.

GBP/EUR exchange rate forecasts remain at 1.10 for the end of 2018 suggesting Sterling will struggle against its European, particularly as the mid-2018 forecast suggests the exchange rate will be around 1.08-1.09.

This is not altogether far-fetched if we consider the significant hurdles facing the UK in its negotiations with the EU on Brexit.

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UBS: Pound-Euro Parity by End 2019

Like others, analysts at UBS note a number of their financial forecasts have been met a lot sooner than anticipated.

"Our previous forecast targets require an update to the developments in UBS economic views and to the prevailing market levels," says Yianos Kontopoulos, a Strategist, with UBS in London.

Like UniCredit, much of the forecast change is however down to Dollar weakness, "the move in GBP and JPY is driven by the broad dollar move," says Kontopoulos.

GBP/USD is forecast at 1.37 for year-end, up from 1.32 previously. End-2019 sees the exchange rate at 1.35, up from 1.30.

Using GBP/USD and EUR/USD forecasts we can calculate the GBP/EUR cross rate and what we see is the Pound-to-Euro exchange rate falling to 1.05 by end-2018 and parity by end-2019!

Crédit Agricole: It's Been a Good Run, But Time to Slow Down

Crédit Agricole have been bullish on Sterling's prospects for some time now, but are wary that the improvement in fortunes might be getting ahead of itself.

"Our above-consensus bullish forecast on GBP has served us well in the past couple of years, during which the GBP sold off in the wake of the EU referendum in Q316, only to embark on a lengthy recovery in subsequent quarters. With the currency having returned to more ‘normal’ levels recently, we foresee a slower pace of gains for the rest of 2018," says Valentin Marinov, Head of G10 FX Strategy with Crédit Agricole.

GBP/USD has already exceeded its long-term fair value of 1.40 held at Crédit Agricole who therefore think that the pace of gains will slow down in coming months and forecast GBP/USD and EUR/GBP at 1.44 and 0.88, respectively, in Q418.

EUR/GBP at 0.88 gives us a GBP/EUR at 1.1363.

Previous forecasts from December 2018 had GBP/USD ending 2018 at 1.40 while the EUR/GBP forecast is unchanged.

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Friday’s press conference will take place at the sidelines of a security conference that is expected to see PM May unveil further details, on Saturday, about the UK’s post-Brexit security relationship with Brussels.